Beyond Capacity Markets: Delivering Capability Resources to Europe's Decarbonising Power System

Delivering a reliable power supply to consumers has always been a central objective of power market design and various solutions to this challenge have been adopted in Europe and elsewhere. In the context of wholesale power markets, these solutions have generally taken the form of market rules to pay for firm capacity, alongside energy-only prices. A closer look at the new reliability challenges associated with meeting Europe’s decarbonisation targets suggests that our collective thinking will need to evolve “beyond capacity markets” in order to address those challenges. In particular, the power system will need resources capable of rapidly changing output or flexing demand frequently and continuously throughout the year around the energy availability from rising shares of variable  renewable resources (e.g, wind and solar). While system reliability has never been solely a matter of the quantity of resources, the answer to the question ‘how much?’ increasingly depends upon the answer to the question ‘what type?’. 

Based on these requirements and related considerations, RAP designed a set of market design principles that can be used to assess the suitability of proposals intended to deliver system reliability. Beyond Capacity Markets - Delivering Capability Resources to Europe’s Decarbonised Power System, an IEEE-published paper, reviews Great Britain’s proposal to introduce a capacity payment mechanism against these criteria. RAP also explores What Lies Beyond Capacity Markets in a “straw man” proposal for discussion, which presents market design options for delivering least-cost reliability under the new resource paradigm facing a growing number of European, as well as US power systems.  

In Market Mechanisms for Resource Adequacy and System Security: Framing the Issues, RAP provides an overview of the new challenges that system planners and market designers face and offers recommendations for framing the discussion around capacity markets in Poland, Germany, and Europe. The need to expand the discussion to include not just the quantity of capacity but also the operational capabilities needed to deliver a least-cost reliability solution will be explored in greater detail in a forthcoming paper, Power Market Operations and System Reliability.

Market designs and policies that enable and activate demand-side flexibility resources, including heat storage, are an inherent aspect of RAP’s beyond capacity market thinking. Demand Response as a Power System Resource reviews the performance of demand response resources in the United States, the program and market designs that support these resources, and the challenges that must be addressed in order to improve the ability of demand response to supply valuable grid services in the future.     

Energy efficiency will also play a critical role in decarbonising Europe’s power system. What Role Does Energy Efficiency Play in 'Beyond Capacity Market' Thinking? identifies two efficiency requirements, specifically, (1) an efficient market will need to be sized efficiently, in addition to being designed to trade efficiently, and (2) all qualifying demand-side resources, including end-use efficiency, should participate in competitive “capabilities markets” on equal footing with other reliability resources. In Energy Efficiency Participation in Electricity Capacity Markets – The U.S. Experience, RAP summarizes the rules governing how efficiency resources have successfully participated in the ISO New England and PJM capacity markets, the impact of that participation, and lessons learned relevant to market design discussions in Europe.  

RAP’s Berlin office is particularly active in communicating this new market design thinking to advance the ambitious goals of Germany’s Energiewende (“Energy Transition”), to phase out all nuclear power plants by 2022 and attain a power mix of at least 80% renewables by 2050. Contact Andreas Jahn, Senior Associate, for more information.